Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act (SOX) originated on July 29, 2002 due to fraudulent bookkeeping practices and misleading financial reports from large corporations. These practices created a number of accounting scandals, which resulted in this in the government creating such an act. The purpose was to prevent and punish corporate corruption and, along the way, try to repair investor confidence. The law was passed by congress after well-known companies (Enron, Peregrine Systems and Tyco International, to name a few) caused great humiliations to its investors, which in result cost them billions of dollars. The share prices of the affected companies collapsed, which shook public confidence in the nation’s securities markets.
The role of internal controls in complying with the SOX (2002) was simply to make the financial reporting consistent and transparent. . Most large corporations have a large compliance department that manages and oversees its finances. The accounting department falls within that category.
Sarbanes-Oxley now clearly places responsibility on corporate executives for the content of a company's financial reports issued to investors. Executives must certify that they have reviewed the reports and that the reports contain no materially false statements or omissions. Financial reports must not be misleading; they must impart a clear and accurate portrayal of the company's financial condition. Although executives don’t need to draft the reports, they must implement and monitor internal controls that affect their preparation.
Debate continues over the perceived benefits and costs of SOX. Opponents of the bill claim it has reduced America's international competitive edge against foreign financial service providers, saying SOX has introduced an excessively complex regulatory environment into U.S. financial markets. Advocates of the measure say that SOX has been a blessing for improving the